The BoC’s promise of low interest rates may lead to market speculation

According to specialists, the central bank Governor Tiff Macklem’s promise of low interest rates for about two years may lead to speculative demand in Canada’s hottest real estate markets.

The Government hopes that a series of stimulus measures and extremely low interest rates will support credit growth and real estate investment. This could help offset the economic damage from the COVID-19 pandemic and oil prices decline.

“In case you have a mortgage, or you’re planning a major purchase, you can be sure that interest rates will remain low for a long period of time”, – noted Macklem.

This comment is inconsistent with the government’s mortgage agency, which has tightened mortgage insurance rules for riskier borrowers in order to restrain the excessive demand and sharp house prices growth.

According to Macklem, the Bank of Canada had pointed to the vulnerability of high household debt levels. However, the current priority is supporting a recovery and the return of jobs. He says these issues are entirely aligned.

Evan Siddall, chief executive of the CMHC, believes that low rates and stricter underwriting rules may co-exist.

“Of course, you can combine low rates to stimulate borrowing by people with strong credit characteristics and measures restraining excessive borrowing by those with weaker credit characteristics,” – he noted.

The Canadian Real Estate Association says home sales were up significantly in May and June, following the weakest April on record. Toronto reported an annual prices growth by 12% last month.

In Vancouver, the average sale price for all home types was C$1.03 million, and Toronto showed C$930,869.

Government support of the total worth about C$230 billion ($170 billion) combined with loan deferrals have pushed home prices higher and postponed expected decreases closer to the end of 2020 or the beginning of 2021, says Nathan Janzen from RBC.

“At that point, we’ll see the real health of household balance sheets,” – he added.

According to John Pasalis, president of Realosophy Realty, although it’s quite normal for central banks to support borrowing during economic downturns, Macklem’s open message to get mortgages could probably lead to speculative buying.

“When investors dominate the real estate market, the prices grow much faster than they should be”, – he explained.